I am a research fellow at the Hoover Institution, at Stanford, and the Cullen Professor of Economics at the University of Houston. I am also a research professor at the German Institute for Economic Research Berlin. My specialties are Russia and Comparative Economics, and I am adding China to my portfolio. I have written more than 20 books on economics, Russia and comparative economics. I blog at paulgregorysblog.blogspot.com.

'Sequester Costs 750,000 Jobs' From Those Folks Who Gave Us the Four-Million-Job Stimulus

The Director of the Congressional Budget Office, Douglas Elmendorf, testified on February 13 before Congress that 750,000 jobs would be lost in 2013 alone if Congress does not avoid the sequester cuts. To put that estimate in perspective: the economy gained 741,000 jobs between September and January 1. Per Elmendorf: The sequester cut, reported to be $85 billion in 2013, will set us back four months of job growth.

I say, using the experience of the 2009 stimulus, that the 2013 sequester cuts will cost us zero jobs.

Elmendorf joins the noisy chorus of doomsayers, who shout “the sky is falling” if we actually cut discretionary spending. In addition to released illegal immigrant criminals, snarled air traffic, fired teachers, and every other imaginable disaster, we now face the loss of three quarters of a million jobs because the recalcitrant Republicans reject reasonable offers from President Obama (who does not communicated with them). Well, Elmendorf, as a good administration solider, gives us yet another reason to petition Congress to back off and let Washington continue to spend.

At least Elmendorf’s 750,000 job-loss figure does not defy reason as does Maxine Waters’s 170 million, which happens to exceed the total number of jobs.

Although Elmendorf did not elaborate on the CBO’s methodology, we know it relies on discredited Keynesian multipliers, which are purported to predict how much GDP will increase for a given increase in government spending (or fall for a given reduction in government spending). These GDP gains or losses are then translated into job gains or losses.

The use of multipliers to predict sequester job losses does not inspire confidence. The March 2011 study of Obama’s Council of Economic Advisors labored hard to find the millions of jobs the $787 billion stimulus promised. The Council’s results strained credulity because the actual job count fell during its period of study, and curious minds wanted to know where the stimulus jobs were.

No problem for Obama’s Keynesians. Even if no new net jobs were created, there were several million or so jobs “saved.” The Bureau of Labor Statistics, it seems, had not heard of the “jobs saved” category, but Obama’s ingenious advisors found that the $629 billion of stimulus money already spent created or saved between 3.9 and 4.9 million jobs from the second quarter of 2009 to the fourth quarter of 2010, while the actual number of jobs fell from 154.1 million to 153.8 million. That is a lot of jobs saved! Good job, stimulus!

We would hope that the CBO learned something from this four-million-jobs fiasco. Obama’s “jobs saved” became a running joke. Surely, in assessing the effects of the sequester cuts, the “non-partisan” CBO would not use the same discredited multipliers. No such luck. My back-of-the-envelope calculation using the same multiplier from March 2011 study yields a jobs-loss estimate (526,000 and 661,000 versus the CBO’s 750,00) close enough to show that the CBO has not budged from their Keynesian multipliers. “There you go again,” as Ronald Reagan used to say. The CBO is a dog that has failed to learn new tricks from past failures.

I prefer to look at the sequester using common sense instead of arcane Keynesian modeling. If more than a half trillion dollars of stimulus spending created no new jobs between March 2009 and the end of 2010, how can a miniscule cut of $85 billion cost 725,000 jobs over the next nine months, as the CBO wants us to believe? The more sensible prediction is that the sequester will cost us no jobs, despite the President’s stump speech warning about the loss of “hundreds of thousands” of jobs.

Note that that the sequester actually will cut $72 billion from discretionary spending in 2013. Spending on exempted categories actually increases, and total federal spending expands by $15 billion. (And I am sure Congress and the President can find a special emergency as an excuse to spend more, such as the $60 billion on Sandy Relief).

My past criticism of the CBO elicited a heated defense. This article will be no exception. My real criticism of the CBO is not its lack of professionalism but its being wedded to a “Keynesian consensus,” which no longer exists. Since the Nobel Prize in economics was established, seven prizes have been awarded to economists who cast serious doubt on Keynesian short-run stabilization. The one economist awarded the Nobel Prize for advancing the Keynesian agenda (Lawrence Klein) ended up revealing the limited value of complex Keynesian models as predictors of the economic future. New York Times leftist columnist, Paul Krugman, won his Nobel Prize for trade theory, not for macroeconomics.

We should drop the “non-partisan” adjective that journalists automatically place in front of the CBO. The CBO is wedded to a partisan approach to economics; namely Keynesian economics. It does not entertain optional approaches. Behind its veneer of objectivity and professionalism it is automatically partisan, although few recognize this truth. Let the CBO recruit those who dispute Keynes and, at least, give them space for minority opinions in CBO studies that will be used in political battles.

Post Your Comment

Post Your Reply

Forbes writers have the ability to call out member comments they find particularly interesting. Called-out comments are highlighted across the Forbes network. You'll be notified if your comment is called out.